Dollar General’s bid for Family Dollar could overshadow earnings

NEW YORK (MarketWatch) — Dollar General Corp.’s second-quarter earnings report on Thursday will not just be about whether the largest U.S. dollar-store chain will deliver on its numbers. Overshadowing the quarterly report is the company’s rejected $78.50 per-share bid for its smaller rival Family Dollar, which has accepted a lower $74.50 bid from Dollar Tree.

Earnings: The Goodlettsville, Tenn.-based Dollar General is expected to report profit in the quarter ended Aug. 1 of 83 cents a share, up from 77 cents a share a year earlier, according to analysts surveyed by FactSet. For the year, they expect profit of $3.51 a share. In June, Dollar General forecast per-share profit of $3.45 to $3.55 a share for the year.

Revenue: Sales are expected to rise to $4.77 billion from $4.39 billion, FactSet data showed. Same-store sales, a key performance metric that strips out results from new and closed stores, are expected to rise 2.8%, after a 5.1% gain a year earlier, according to FactSet.

Stock reaction: Dollar General jumped 12% to $64.14 on Aug. 18, when it made an unsolicited higher offer for Family Dollar. The stock has been little changed since Family Dollar spurned its offer last week. The stock is up 6.2% year to date, compared with a 8.2% gain in the S&P 500.

Key points: Investors will be looking for an update on what Dollar General intends to do next in its pursuit of Family Dollar. Dollar General
DG, +0.32%
has said it’s committed to buying Family Dollar. MKM Partners analyst Patrick McKeever said Dollar General can afford to up its bid to the mid-$80s a share and still see the possible merger add significantly to its bottom line.

Wall Street favors a Family Dollar deal with Dollar General over one with Dollar Tree. They argue antitrust concerns aren’t an issue and said a Dollar General buyout of Family Dollar
US:FDO
would yield much higher cost synergies, since both sell products at different price points and both are more heavily concentrated in rural markets targeting lower-income shoppers.

In comparison, they said Dollar Tree
DLTR, +0.57%
, which sells items for $1 apiece, is located more in suburban markets catering to middle-income shoppers. Dollar General had a 35% share of the variety stores category in 2013, versus 22.9% for Family Dollar and 16% for Dollar Tree, Euromonitor data have showed.

Analysts also said a combination between Dollar General and Family Dollar also will make a stronger competitor against discount giant Wal-Mart
WMT, -0.25%
, which is eager to push its own small-store format as well to attract the mid-week fill-in shoppers who would rather buy closer to home than make weekend treks to stock-up at supercenters.

On the fundamental side, investors will be looking for continued gains from Dollar General’s sales of tobacco as well as initial impact from its rollout of digital coupons. They also will be looking to see whether margin has been hurt by any increased sales of consumable items. Sales impacts from food stamp cuts that have hurt low-income shoppers also will be a focus.

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